Aug 7, 2018

Still convalescing from the heavy selldown post GE, our July alpha picks delivered a simple average gain of 11.3%, above FBMKLCI’s +5.5%, as the new government’s decisions on mega projects have been less disruptive than feared, thus allowing construction stocks to partially recover. We add MRCB to August’s picks, along with Bumi Armada, CMS, Gabungan AQRS, Inari and VS Industry.

WHAT’S NEW• Review of July’s picks. Recovering from a hefty selldown from GE 14’s aftermath, 5 out of 7 of our alpha picks were above the FBMKLCI’s mom return of 5.5%. The portfolio garnered a simple average of +11.3% for the same period, mainly led by CMS’ stellar performance (+34.0% mom) which we attribute to rising optimism in 25%-owned OM Sarawak’s significant recovery of higher production and improved ASP. This was followed by Gabungan AQRS’ +16.7% returns due to multiple factors (fee warrants, potentially generous dividends from 2019-23, and optimism in securing mega projects). • SPLASH deal to provide ripples in other government deals. Last Friday, the government significantly upped its offer to buy water treatment plant SPLASH to RM2.55b, more than 10x higher than the offer made in 2013. While still at a substantial discount of 20-25% to Splash’s book value, the deal is positive (and expected to be accepted SPLASH’s owners) as it resolves a long-term gridlock for this cash flow- strapped entity. We reckon SPLASH’s resolution will lead to expectations that: a) the long overdue water pipeline replacement projects (benefitting pipe manufacturers like Engtex), and b) resolution to more government dependent deals, such as the sale of MRCB’s EDL highway.

Bumi Armada (Kong Ho Meng) • 2018 is set to be a turnaround year for the group, with earnings set to ramp up from 2Q18 on Olombendo's final acceptance in May 18. The improved frequency of monthly offloadings of Kraken to three tankers since Jan 18 is positive as it shows Kraken’s production improvement is real and ongoing. This will sustain Kraken's earnings qoq into 2Q18, while Kraken's final acceptance is also on track by mid-18 (which will lift 2H earnings further). We also see the possibility of a TGT1 extension by Aug 18.

Share Price Catalyst • Conclusion of final acceptance of Kraken and Olombendo by 1H18. • Recovery of OMS utilisation and rates.

Cahya Mata Sarawak (Abdul Hadi Manaf) • We expect 2Q18 earnings to be substantially strong, driven by a major turnaround at OMS. Currently, CMS is trading at only 10.9x forward PE. We expect the PE to trend closer to pre-GE level as the recent sell-down was unwarranted. • 2Q18 earnings are expected to neatly beat consensus forecast, led by a significant earnings jump at 25%-owned OM Sarawak.

Gabungan AQRS (Kader Farhan) • Provides both earnings growth and generous dividend payments (2019-23), backed by sales momentum of property development division . The company is targeting to secure> RM2b of contract works for ECRL as well as Sabah portion of the Pan Borneo Highway Sabah (PBHS), which would also lift the group’s precast manufacturing division. The government has allowed the ECRL project to proceed, while a final decision on PBHS is still pending (although construction works are already ongoing for some stretches).

Inari Amertron (Yeoh Bit Kun) • Earnings are expected to improve hoh in 2HFY19 on: a) RF production ramp-up to support its US end-customer’s smartphone launch in September, and b) contribution from data centre chip testing job and fibre-optics chip fabrication and wafer certification jobs. • Outlook remains positive on: a) new jobs from OSRAM (related to facial recognition and health sensor products for smart devices and mini LED for billboard applications), b) in- house job (foundry bank-end process for fibre optics products) transfer from Broadcom to be completed at end-18, c) consolidation of operations to improve operational efficiency, and d) potential new business for its Batu Kawan plant which is currently under construction.

MRCB (Kader Farhan) • The development of KL City Project in Bukit Jalil (GDV: RM20.7b) and the potential sales of EDL are expected to strengthen its overall earnings and balance sheet. In addition, its strong orderbook backlog of RM6.2b would potentially provide earnings visibility for its construction arm for the next 3-4 years coupled with its modest reliance on federal government's related project. Also, Putrajaya's nod to proceed with LRT3 project shall be viewed positively as MRCB will continue to become the project delivery partner (PDP), although the proposed "fixed contract" mechanism may potentially contribute lower earnings vs pre-agreed PDP fees.

VS Industry (Fong Kah Yan) • We believe that the worst is over after the weak 3QFY18 results. We expect margins to recover on better operating leverage on commencement of new models for its key customers in 2H18 and 1H19. VSI is currently focusing on filling up capacities at its two new plants which came on-stream in mid-18. Hence, potential large contract wins to fill- up capacities at the plants will lift sentiments further.

Jul 11, 2018

SKP RESOURCES BHD

SKPRES has gapped- - up to close above the EMA20 level accompanied by improved volumes. The MACD Indicator has issued a BUY Signal, while the RSI has risen above 50. Price may advance, targeting the RM1.63- - RM1.75 levels. Support will be pegged around the RM1.34 level

Jul 6, 2018

From bad to worse: Stop work order for ECRL

■ Malaysia Rail Link (MRL) has confirmed The Edge Markets’ report that MRL had instructed CCCC to suspend construction works of the ECRL with immediate effect. ■ We are not surprised by this development as the suspension of works is likely to make way for a scaling-down phase and to limit additional loan drawdowns. ■ Maintain Underweight. Risks arising from a temporary stop work order on the ECRL include further delays in the re-tender phase of the project involving local players.

Suspension of construction works on “national interest” grounds ● According to The Edge Markets, the East Coast Rail Link’s (ECRL) project owner Malaysia Rail Link Sdn Bhd (MRL) has ordered its main contractor, China Communications Construction Co Ltd (CCCC), to immediately suspend all ongoing works relating to the EPCC scope of the ECRL. ● The suspension was invoked on the grounds of “national interest”, according to MRL. It will be in effect indefinitely, or until MRL provides further instructions to CCCC.

A necessary move if substantial cost cuts are needed ● We are not surprised by the call for suspension as the new Pakatan Harapan government had said that it intends to renegotiate the ECRL’s costs and terms. Finance Minister Lim Guan Eng said in a statement yesterday that the cost of the ECRL project at RM80.9bn “must be reduced significantly to make it viable financially”. ● The aforementioned figure is made up of construction cost (RM66.8bn), land acquisition cost (RM2.5bn), working capital (RM50m), other operational costs (RM500m), and total financing costs (RM11.1bn). ● Additionally, Lim said MRL had coughed up RM19.7bn, or nearly 30% of the ECRL’s construction value. RM10bn was paid out to CCCC as an advance and another RM9.7bn as progress payment.

● In the worst-case scenario, MRL can recover the RM10bn advance payment as it is backed by an advance payment bond of an equivalent amount. This advance payment bond may be redeemed by MRL to recover all of the advance payment.

The Selangor factor that could hinder the ECRL ● Lim also revealed that the Selangor state government opposes ECRL’s second phase, running from the Integrated Transport Terminal (ITT) Gombak to Port Klang. The location runs within the vicinity of the Klang Gates Quartz Ridge, a quartz dyke that the state had applied to become a UNESCO World Heritage Site. ECRL phase 2 would disrupt this plan.

Local subcontractors’ portion shrinks to RM9bn-RM18bn ● In our view, the suspension of works is likely to make way for a scaling down phase and to limit additional loan drawdowns. ● Recent media reports have indicated that the government intends to cut the ECRL’s construction cost to between RM30bn and RM40bn. ● Using a 30-45% local subcontractors’ portion, this would translate to RM9bn-RM18bn.

Maintain Underweight; delay could dry up 2H18 job flows ● We maintain our Underweight stance on the sector. The progress of ECRL has gone from bad to worse, with this latest decision to suspend works. Risks arising from a temporary stop work order on ECRL include further delays in the re-tender phase of the project involving local players, in our view.

Jul 4, 2018

KAREX BERHAD Stock Code: 5247

Chart-wise, the stock has been trading in a range between RM0.750 to RM0.850 for the past two weeks after a short rally in early June. Yesterday’s candlestick broke through its previous swing high resistance of RM0.850 which could signify a continuation of June’s rally.

Momentum indicators continue to show meaningful upticks and the 20-day SMA has just crossed above the 50-day SMA yesterday for the first time since October 2017.

From here, we expect the stock to face resistances at RM0.925 (R1) and RM0.995 (R2).

On the other hand, supports can be identified at RM0.850 (S1) and RM0.750 (S2).

Jun 27, 2018

Symmetrical triangle breakout.

SCICOM could be riding on the healthy tourist growth (11.8% in 2017) in Cambodia, following the award of contract from Ministry of Tourism of Cambodia. SCICOM has a net cash of RM45.8m (12.9 sen/share) as of end March 2018 and its dividend yield stood at 4.5%. The share price suggests that SCICOM has experienced a symmetrical triangle breakout above RM2.00, accompanied by healthy volumes. Upside will be pegged around RM2.29- RM2.40, followed by a LT target of RM2.50. Support will be located around RM1.84-1.90, with a cut loss at RM1.80.

Figure #1 Weekly chart: Hovering above weekly SMA200:

Company profile. Scicom (MSC) Berhad (SCICOM) is engaged business process outsourcing (BPO), which features four core segments, namely (i) Customer Lifecycle Management, (ii) Education solutions, (iii) e-Commerce Solutions and (iv) e- Government services. At this juncture, the integrated solutions company has 64% of revenue generated from Malaysia, while the rest are registered internationally (Singapore, Philippines, Thailand, Sri Lanka and China).

Figure #2 Daily chart: Symmetrical triangle breakout above RM2.00

Cambodia tourism management system project. SCICOM has been awarded a project by the Ministry of Tourism of Cambodia to develop, implement, operate and maintain a fully integrated Cambodia Tourism Management System for a period of five years with an extension option of two years. The expected revenue from this contract is dependent on the number of air travellers to and from Cambodia. SCICOM commented that it will not have any effect on its earnings until FY19. We believe the project is positive for SCICOM, judging from the healthy growth of 11.8% in 2017 of international tourist arrivals to Cambodia (Figure #3).

Net cash, decent dividend yield and compelling ROE. SCICOM has a net cash position of RM45.8m (12.9 sen/share) as of end March 2018 and its dividend yield stood at 4.5%. We believe given its expertise within the e-Solutions services would be able to maintain its compelling ROE of 34%, while continue to reward the shareholder with its healthy cash position. Despite the potential downside risk towards its current domestic, following the recent changes in Malaysia’s political scene, we believe the outlook remains positive supported by the international BPO clients as well as the project from Cambodia.

Figure #3 International tourist arrival to Cambodia (2012-2017)Symmetrical triangle pattern breakout. SCICOM rallied since February 2018 from the RM1.68 level towards the 2018 peak of RM2.14 in March. Since then, it has been consolidating sideways within a symmetrical triangle formation over the past four months. We opine the uptrend remains intact as the prices are hovering the weekly SMA20 and above the daily SMA200 and volumes have been picking over the past two days with the price surging above the RM2.00 (trendline). We anticipate that the share price could retest the all-time-high of RM2.29, followed by RM2.40 as well as a LT target of RM2.50. Support will be pegged around RM1.84-1.90, with a cut loss set below RM1.80.

May 16, 2018

Reassurance From New Council Of Eminent Persons

The Council of Eminent Persons held a briefing for investors, shedding some light on certain broad-based measures. However, details of fiscal reforms will only be announced in the first 100 days, aimed at raising disposable income. Architects of the PH manifesto reiterate that the government must deliver: a) institutional reforms – including reducing/eliminating corruption, b) strong check and balance, and c) economic reforms – ensuring that money is in the hands of Malaysian households.

WHAT’S NEW• Council of Eminent Persons instilling confidence. The newly-formed Council of Eminent Persons (Council) held a briefing for investors yesterday with Tun Daim Xainuddin and Tan Sri Zeti Aziz as speakers. Raising disposable income is a key focus. The Council has been actively meeting various representatives from the investment community (eg GLC funds) and regulators (eg MoF, Securities Commission, Chamber of Commerce) and reassured that Malaysia’s fundamentals and financial system remain strong, and that any near-term weakness in the fiscal position due to the abolishment of GST will be short-term in nature as swift execution of its economic and institutional reforms should lead to stronger market confidence and consequently improved fiscal position and ringgit strength.

• Key highlights of the briefing. a) Measures of the comprehensive fiscal reform to be released within the first 100 days will be orderly in nature. b) Comprehensive review of the tax regime with emphasis on GST. c) Emphasis on reducing public wastage (eg government’s procurement cost) and curbing of corrupt practices as well as scrapping certain mega projects will help to partly plug the revenue gap from the abolishment of GST. d) A task force to be set up to recover 1MDB monies and a separate group comprising the MACC, Attorney General and police to investigate scandals and charge relevant people involved in the 1MDB scandal. e) The government’s role will gradually decline and the private sector playing a more prominent role, hence reducing the “crowding out effect” on private investments. f) More transparent open bidding and assessment of mega infrastructure projects. g) Made recommendation to the government that no politicians be involved in GLCs. h) The government will also honour its debt obligations with regard to toll concessionaires.

• Setting up a committee on institutional reforms. The Council has also announced the formation of a committee on institutional reforms, crucial in ensuring a strong follow through and execution of the positive economic reforms

ESSENTIAL• The Pakatan Harapan manifesto… We had recently attended a forum titled “Keeping The Promise of Reform” organised by the Jeffrey Cheah Institute on Southeast Asia. Key panelists Wan Saiful and Liew Chin Tong were some of the many architects behind the Pakatan Harapan manifesto. • ...focuses on the well being of the rakyat and a strong check and balance system. Key takeaways are: a) strong emphasis on the need for institutional reform, and b) economic reforms. The key message on economic reforms is that ordinary Malaysians must benefit from economic growth and it is the role of the government to make sure that the money is in the hands of the households (focusing on productivity and multiplier effect of the economy). It is also the job of the current government to reduce/ eliminate corruption and create a strong check and balance system (including limiting the Prime Minister’s term of office and ensure a strong and viable opposition party by providing funding for them).

May 14, 2018

GE14 Results: Sweeping Changes

Pakatan Harapan creates history with its surprising sweep of parliamentary and state seats in the most hotly contested elections in Malaysia. While widely expected, post- GE market jitters should create good buying opportunities as the sell-down may not be too deep should the new government quickly assert business-friendly policies. However, 2018’s outlook remains challenging amid expectations of a global liquidity contraction.

DEFENSIVE STOCKSWHAT’S NEW PH paves way for new dawn. Pakatan Harapan (PH) led by the 93-year old former prime minister, Tun Dr Mahathir Mohamad, fulfilled the ‘Rahman’ prophecy by dislodging Barisan Nasional (BN) to win 121 (54.5%) of parliamentary seats inclusive of ally party Warisan’s 8 seats (GE13: 89 seats), and an additional 5 states (in all controlling 7 states).  In state results, PR successfully defended Penang and Selangor, and won Kedah, Malacca, Perak, Negeri Sembilan and Johor from BN. A surprise, PAS retains control over Kelantan and wrested control of Terengganu from BN.  Sweeping control over hot seats, reflecting majority of voters’ sentiment. Of the 60 perceived hot seats, PH wrested 19 seats from BN while losing only 5, according to available (but incomplete) information. Many prominent BN leaders lost, including component parties MCA’s and MIC’s presidents, and several ministers.

NOTABLE STOCKS TO ACCUMMULATE ON WEAKNESS

ACTION Market sell-off to create opportunities. We are reviewing our end-18 FBMKLCI target of 1,830 for a modest downgrade. While PH brings hope for better transparency, accountability and financial prudence, investors would be sidelined by the current transitory state. Foreign inflows (+RM2.7b ytd) could reverse, potentially causing the ringgit to weaken. Nevertheless, this is not a ‘-1SD’ sell-off. Hopefully, the widely market sell-off may not be as deep as feared should PH quickly obtain the royal pronouncement as the rightful government, while declaring a two-day cooling-off holiday can provide some leeway for PH to ensure the investment community that it would pursue a business-friendly policy. PH has just publicly declared that it would not avenge and its main motivation is to ensure the rule of law.  Knee-jerk impact. The most impacted stocks could include perceived politically-linked companies (DRB-Hicom, George Kent, MyEG) and selected mega projects’ beneficiaries on concerns that PH may want to review pricing or defer some mega projects. In his final campaign address, Dr Mahathir voiced his displeasure over DRB’s stake sale in Proton. There could also be a knee-jerk impact on AirAsia, given Tony Fernandez’s open support for BN.  Buy high-yielding defensive stocks with relatively low foreign portfolio ownership and apolitical growth stocks. The former category of stocks should gain prominence, including sold-down BAT, DiGi, Magnum and YTL Power. FMCG stocks (including brewery stocks) also appeal, with the exception of the well-overvalued Nestle. We would accumulate selected export-oriented stocks, particularly E&E stocks Inari, Globetronics and VS Industry. On paper, gaming companies should benefit, given PR’s intention to repeal GST, although pragmatically, these companies may be subject to other forms of new taxes. We would also accumulate on weakness MRCB, which is considered apolitical (as it MRCB’s good welfare benefits EPF contributors).